As our use of automobiles and mobility in general evolves, automobile insurance shall have to evolve, too. Most insurance policies today protect drivers and owners against three types of risk:
- liability for damage caused to other parties
- health care in case of injury
- loss or damage to one’s automobile
As we increasingly think of automobiles as resources that enable mobility, rather than financial assets, insurance policies will need to keep in step with this change. In particular, we shall need to insure against the risk of lost mobility.
Let’s take an example of insurance that works as intended. Party A purchases a new automobile. Party B causes an accident which damages the automobile of party A. Party B’s liability insurance will cover the cost of repairing party A’s automobile.
In another example, party A drive’s its automobile into a fire hydrant and damages both it and the automobile. Party A’s liability insurance covers the cost of repairing the fire hydrant and the collision insurance covers the cost of repairing the automobile.
Now let’s take another example. Party C has a 15 year old automobile. It runs great. That car is used to travel to and from work, as well as for innumerable other trips of all sorts. Party A causes an accident with Party C. However, in this case, Party A’s insurance company says, “The cost of repairing party C’s automobile far exceeds it’s market value. We will pay only up to the market value of the vehicle.”
In this case, party C might recover the financial value of the automobile, but has lost mobility. As it is impossible to find an equivalent automobile with the money paid by party A’s insurance, party C suffers a significance loss of mobility and the related strains and losses. Junior no longer has transportation to athletic matches. However is party C to do the week’s grocery shopping? Trips to the doctor become nightmarish.
Can we imagine insurance that covers the risk of lost mobility, complementing the loss of an automobile’s market value? When an automobile is newish and its market value exceeds the cost of repairs, the traditional insurances provide coverage. But as the market value becomes lower and lower, we inevitably reach the point where the mobility insurance would come into play.
Typically, automobile owners buy collision insurance for newish cars, but let it lapse after a few years. Instead, they could maintain that coverage indefinitely, with the coverage changing from protection of financial asset value to coverage of the costs of mobility.
How do we calculate the cost of mobility? Clearly, the calculation depends on the degree to which the insured lives in a region covered by a public transportation network. When there is no such network, then mobility depends on taxis or ride-sharing services. When even these services are lacking mobility depends on finding replacement vehicles.
An argument might be made that automobile insurance is not intended to replace prudent financial management of one’s assets. In particular, any asset is supposed to have an operational life, during which time provisions should be accumulated toward the ultimate replacement of that asset. Thus, suppose you buy an automobile for 40’000, expecting to use it for 10 years. In addition to all the operational costs , you should set aside 4’000 per year (or more) so that in ten year’s time you will have the funds needed to replace the automobile.
Of course, most people do precisely the opposite. Rather than saving up money to buy something in the future, they borrow money at purchase time and end up paying much more, due to the interest charges.
Be that as it may, collision insurance is conceived today as protecting you against the risk of needing to replace the automobile before you have saved enough money to replace it.